What is a home REALLY worth? Well it depends on who you ask.
If you ask a Seller, they’ll tell you it’s worth what they’re asking for it. If you ask a Buyer they’ll tell you it’s worth what they’re offering.
If you ask an Appraiser, they’ll tell you that their profession is based on one concept: The Fair Market Value of a home is what a knowledgeable, unpressured, and willing buyer is willing to offer and a knowledgeable, unpressured, and willing seller is willing to accept. Alright … That’s all great in theory, but how do you go about predicting the fair market value of a particular home??? – KEEP READING!
It turns out, that there is really nothing mystical about estimating fair market value, which is just another way of saying, estimating the most likely sales price of a home. …Even a Realtor can do it 🙂
It starts with another basic idea: The most likely sales price of a home will be equal to the sales price of an identical home, in an identical location. (Obviously, no two homes are identical, but bear with me.)
So to apply this theory, if my brother and I both own condos in the same complex, on the second floor, with the same views, in the same condition, and he sells his condo for $300K today, if I put my condo up for sale the same day, the most likely sales price of my condo will be $300K.
We are of course assuming both buyer and seller to be knowledgeable, willing, and unpressured.
If you can accept this basic idea, then the only questions are:
- How do I find a home in an identical location?
- How do I find a home with identical characteristics?
- How do I find a home in identical condition?
Well the good news is, you don’t have to!
What you do have to do is find multiple homes with as many similar traits as possible in the closest possible location and simply average them out. The closer your “comparable” properties are to the subject property in location, characteristics, and condition … the more accurate your estimate of likely sales price. What this also means is that the more home sales you have to compare the subject property to, the more accurate your prediction.
When an Appraiser looks for comparables for a particular home, here are some of the main considerations:
- LOCATION – (In CAPS, because there is nothing more important in Real Estate than location!) An Appraiser will generally look for properties in the same zip code and city (within the same socio-economic area) -usually within a 1 mile radius if possible.
- Square footage – They will allow up to a 25% variance in square footage to the subject property, but will keep the variance as tight as possible.
- Number of bedrooms – You have to compare apples to apples, so your comparables must have the same number of bedrooms as the subject property
- Date of sale – For an Appraiser, the sale date has to be within the past 3 months to be considered.
- Other important factors are: age, condition, school districts, lot size, etc…
Then once the Appraiser finds the appropriate comparables, they adjust the price of these homes to account for additional differences such as remodels, # bathrooms, etc. to make them as similar as possible to the subject property. So for example if the subject property and the comparable property are identical but the comparable has a pool, the Appraiser might subtract $10,000 from the price of the comparable to adjust for the pool. They then take a weighted average of the adjusted prices of the comparables – putting more weight on the best comparables – to get a true estimate of value.
Unlike an Appraiser who is bound by bank regulations, such as only being allowed to use comparables sales from the past 3 months, we are perfectly fine with 6 month out (in this market) and even up to a year if we deem it necessary to get an accurate picture of value. Also, unlike an Appraiser, we should use a much narrower margin for sqft (I try to stick to within 10% of the subject property).
Once you take all of the factors into account, you will often find that out of a dozen near-by home sales, only 1 is a true comparable. Ideally you would have at least 2 or 3 good comparables for each subject property, but that is not always the case.
So now lets apply what we learned in a real life example. Here is the info for a subject property:
101 Subject Property Ave, San Jose . Single Family Home – 4 Bedrooms, 2.0 Bath, 1940sqft
Here are my hand-picked comparable sales to 101 Subject Property Ave within the past 6 months. Each of these is within a few streets away from Subject Property Ave, each has 4 bedrooms and is as close in sqft as possible, and each is similar in age, condition and lot size… we actually have a good number to choose from here, which makes it easy and accurate:
1 Comparable St San Jose 4 bed 3|0 bath — 2,080 sqft $369.71/sqft — Sales Price: $769,000
2 Comparable Dr San Jose 4 bed 2|0 bath — 1,985sqft $377.83/sqft — Sales Price: $750,000
3 Comparable Av San Jose 4 bed 2|1 bath —1,870 sqft $390.37/sqft — Sales Price: $730,000
4 Comparable Av San Jose 4 bed 3|0 bath — 1,850sqft $376.76/sqft — Sales Price: $697,000
5 Comparable Av San Jose 4 bed 2|0 bath — 1,850sqft $367.57/sqft — Sales Price: $680,000
6 Comparable Ct San Jose 4 bed 2|0 bath — 1,800sqft $366.11/sqft — Sales Price: $659,000
7 Comparable Av San Jose 4 bed 2|0 bath — 1,800sqft $361.11/sqft — Sales Price: $650,000
Create a list of comparables – DONE!
Get All of the averages:
AVERAGE VALUES for comparables are: 4bed, 2bath — 1,891sqft — $372.78/sqft — Sales Price: $705,000
Verify how close your subject property is in attributes to the average and multiply the average price per square foot by the sqft in the subject property: $372.78/sqft * 1940sqft = $723,193
THAT’S IT – for a simple estimate!
What this tells you is that if the Subject Property is in “average” shape and condition, it will sell for around $723K
If you would like to do a more accurate estimate of value it will involve adding subjective factors, and elements from other Appraisal concepts such as progression and regression that are illustrated by the following examples. Take these two situations:
- If the subject property is remodeled, but none of the comparables are, how much value do you put on the remodel?
- What if it’s vice versa and the subject property is un-remodeled while all of the comparables are.
The easier situation to analyze is actually #2, because a potential buyer would want to drop their offer price by the entire cost of the missing remodel, since it is expected that a home in this area would be remodeled. In #1 it’s quite the opposite. No one is expecting homes in this area to be remodeled, so even though it’s great that the subject property is, at best, a potential buyer might pay an extra 50 cents on the dollar for all of their remodeling … and quite possibly much less.
The basic idea of Progression is that you should buy the worst house on the best street, to benefit from the increasing prices of your neighbors (that will rubb off on you). Regression on the other hand would be having the biggest and most expensive house on the street, so your neighbors are constantly dragging down your property value.
From here on, it gets more and more complex, but all you really have to know is right here. If you do what I outlined, you’ll find that you’ll be able to estimate the sales price of a condo in a complex with multiple recent sales within $5K-$10K every time. Single family homes and Multi-Family are a little trickier, so it’s not quite the same accuracy, but the idea is the same.
If you are curious about the prices in your area, or would like to speak to a Realtor regarding possibly buying or selling a home, CONTACT US today!